The Market Wrap Friday 7-1-2011

By Jason Fittler

It has been three years since the start of the Global financial Crisis.

Like all major events, the recovery is a slow and steady process.

If we look at the year in review, (see below chart) you will note that although the year was volatile it spent most of the year between 4520 and 4760.

All up, the market moved sideways, we can expect more of the same this year.

The strategy we have adopted over the past 2 years is to buy good quality long term, high yielding stocks and hold for the income. Growth will come with time. We continue with this theme into 2011 and expect the volatility to continue.

History Lesson

The below chart shows the market fall in 1987, those who are old enough will clearly remember this time in history. Note that the volatile nature of the market between the bottom in 1988 and the low in 1991. Finally, the technical bottom was in late 1992 before the market started to move back into a Bull market. 

What is important to note is during this time the market generally moved sideways. It wasn't until 1993 that we saw the market start to move back into the growth stage.

By these standards you should not expect to see the current market move into the growth stage until 2014, and we also expect that we could see the market re-test the March 2009 low during this year.

Still to come!

The economy is yet to bottom, I expect that this will happen in 2012 and 2013, the bottom of the economy will be reflected in wages not increasing, slow down in retail spending, higher unemployment and fall in the property market.

We are just now seeing the start of the property market collapse. Newspapers are reporting the slow down in the property market and we can expect to see this deteriorate.

The two major factors affecting the property market are job security and lending practices.

As the banks tighten their lending practices less people will qualify for loans. Add to this the increase in interest rates and you have even less people looking for loans. Less loans equals less people look to buy property, ergo, prices will drop.

Talk to any Real Estate agent worth their salt and they will tell you that it is a buyers market. Simply put there are more sellers then buyers at present.

2011 is shaping up to be a fantastic time to get that extra cash into the market, you may have to wait a couple of years to see the growth but investing is a long term activity.

In the meantime, sit back and enjoy those dividends.

6% = 6%

Bank Term deposits are paying 6%, big blue chip shares are also paying 6%. Logic tells you that if you are getting the same return then invest in the lower risk investment. In this case, the term deposit. However, 6% does not always equal 6%.

Lets work some examples

Term Deposit

You invest $100,000 at 6% for 12 months.

Interest paid is                                     $6000.00
Less tax at your marginal rate of 30%    $1800.00
Less adjustment for CPI 3%                  $3000.00

Net in your hand                                 $1200.00

Your net return is 1.2%
(CPI related to the purchasing power of money or inflation, what cost $100 this year will cost $103 next year.)

Blue Chip Share

You invest $100,000 into a stock that pays a 6% fully franked dividend for 12 months.

Dividend paid is                                    $6000.00
Plus Franking Credit                               $2571.00
Less tax at your marginal rate of 30%     $2571.00

Net in your hand                                  $6000.00

Your net return is 6%.

When dealing with shares, CPI has no effect on the income, as the price of the share will increase over time usually faster then inflation. When dealing in cash the value never changes, as such it is affected by inflation.

If you would like to find out more please contact us on 07 4771 4577.